Tuesday, November 4, 2008

Investing: From the Financial Advisor Model to the "Come on Lucky Seven" Model

All three major online retailers (TD Ameritrade, Charles Schwab and Fidelity) are showing surges both in their account numbers and in their trading volume, while "Merrill Lynch, whose army of brokers was known as the "thundering herd", reported a drop in brokerage commission revenue of 6 per cent, to $1.7bn, for the September quarter compared with the same quarter the previous year."

More than likely, what we're seeing here is a move on the part of retail investors away from the Financial Advisor model and into something we'll call the "Roll the Dice Model". The simple fact of the matter is that for anything other than an indexed buy and hold strategy the average person doesn't know enough about the markets to operate with any efficiency. Moreover, they don't know enough to beat the markets, which is what this is all about. If the average person, let's say your parents, were less interested in beating the market and making millions, and more interested in a steady return that leads to retirement, they would have been invested in bonds.

That the public is so enthralled with the prospects of getting rich in the stock market isn't anything new, but it's something that people have come to feel entitled to, which is kind of new. It's that sense of entitlement that has led to the backlash from the huddled masses: they actually believe that regardless of how everything plays out on the street, that they deserve 10% risk free. They use phrases like "it's not fair" and "they screwed us" but it is far, and we didn't screw you: this isn't a pension, this is the stock market. This trend isn't solely taking place in the public sector either, over the past 20 years the standards boards have moved to ensure that corporations act in a manner that best reflects shareholder interest, which as things have it can be in direct conflict with the best line of action for the company.

I guess what I'm getting at here is this: maybe we've moved in the wrong direction. Maybe we need to saddle up and address the fact that the equity markets are not now, nor have they ever been an appropriate vehicle for retail investors at large. The bond markets don't have the flashy returns and the BSD thrill of the equity markets, but they do provide one thing: consistency.